I'm the Beijing Bureau Chief for Forbes. I joined the magazine in Bangkok where I covered Southeast Asian business and politics for over a decade, taking me deep into the weeds in Indonesia, Myanmar and Thailand. In my new role I blog on all things China, from tech whizz success to political bottlenecks and botched acquisitions.

Chinese Policy Bank Helps ZTE, Huawei To Fly The Flag

It’s been a tough year for ZTE Corp, which exports telecoms gear and gadgets to over 100 countries. Its income has declined sharply, driving down its Hong Kong-listed shares. In the U.S., it faces stiff resistance from lawmakers who see ZTE and its rival Huawei Technologies as a security threat. Domestic sales are perking up as Chinese telcos roll out trials of 4G networks, but the fact remains that ZTE and Huawei get over half their revenue from exports of goods and services. Financing overseas contracts for mobile and broadband networks is critical for both firms. That’s why ZTE’s shares rebounded this week after it announced Tuesday a $20 billion credit line from China Development Bank, a state-run policy bank that stands behind Chinese multinationals. In a statement, the company said that it was “entering a new phase of growth”.

To put this in perspective, ZTE’s forecast revenues for 2012 are $15 billion, according to Goldman Sachs. The $20 billion loan facility is a lifeline to a company that has heavily discounted its products and services in order to enter new markets. In a recent interview, Chairman Hou Weigui told me that this strategy is essential to winning orders from the ‘Big Ts’, telecom operators that dominate North American and Western Europe. He was upbeat on the company’s export performance despite the blows to its bottom line. No doubt his executive team was busy fine-tuning the terms of the loan facility. U.S. critics are likely to pounce on the generosity of the CDB, which also provides cheap credit to Huawei, as another sign of how entwined these companies are with China’s policy objectives. The two telecom-gear makers are already in the sights of European Union regulators over subsidies. Rival network builders like Siemens, Alcatel-Lucent and Cisco also offer vendor financings, but not on the scale of the credit lines extended to China’s IT champions. U.S. lawmakers raised this issue with ZTE and Huawei officials during committee hearings, though their prime focus was on network security. Indeed, the rest is mostly flim-flam; U.S. security hawks aren’t fussed if Siemens or Alcatel gets state support. What matters is who has access to data and phone networks and whether or not you trust them.

Credit for overseas vendor financing should mean more foreign visitors to ZTE’s main training centre in Shenzhen. Built on a coastal resort outside the city, the campus has over 300 rooms where engineers stay while they train on ZTE systems. When I visited last month, a team from Egyptian Telecom was hunched over PC terminals in a classroom lined with ZTE servers for fixed-line networks. Upstairs in the visitors’ canteen, the block-mounted flags on the tables told their own story of overseas growth. Cuba, Zimbabwe, Iraq and North Korea: all customers for ZTE-branded network equipment. It felt like a seaside retreat for the Non-Aligned Movement. Conspicuous by their absence were flags from ZTE’s target markets in Europe and America (the ‘Big Ts’). ZTE runs training facilities in Europe, which is closer to home for European telcos, but I’d imagine their engineers would still want to visit the flagship campus, if only to enjoy the travel perks. The reality is that ZTE has been far more successful in developing countries at undercutting Western rivals but has yet to succeed in higher-cost markets. It may yet get there, despite the U.S. blackballing. But the road looks rockier than before.

Touring the campus, I didn’t spot any Iranian flags. ZTE is currently under investigation by U.S. government agencies for reexporting U.S. equipment to Iranian operators (it denies any wrongdoing). Now Huawei is back in the spotlight for the same reason. Reuters reported Wednesday that Huawei offered to sell surveillance equipment to an Iranian wireless operator for its broadband network. The system allows operators to reconstruct emails and track users, among other uses. ZTE is also accused of supplying surveillance gear to Iran. This is a red flag to U.S. politicians and regulators. Not the kind of flag that Chinese firms want to fly.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

$20 billion “lifeline”. HAH! The “heavily discounted its products and services in order to enter new markets” part is just part of their state driven global war strategy, and the “lifeline” is just more ammo sent to the front, and plenty more promised for when supplies run low.